Inactive director liable for company’s losses

The New South Wales Court of Appeal has upheld orders holding two directors liable for losses suffered by their insolvent cosmetics company after it incurred substantial liabilities for renovations to their family home and transferred almost $1 million offshore shortly before liquidation. In Kim v JM World AU Pty Ltd (in liq); Bak v JM World AU Pty Ltd (in liq), the Court dismissed appeals by Yeong Jeen Bak and Eun Hee Kim from findings that they breached their duties as directors of JM World AU Pty Ltd, a wholesale cosmetics distributor wound up in June 2021. President Ward and Justice Black formed the majority, while Justice Leeming dissented on whether Kim’s inactivity caused the company’s losses and whether the family home should be subject to an equitable charge.

The dispute arose from a $2.16 million building contract for renovations to a Killara property owned 99% by Kim and 1% by Bak. Although the property was personally owned, the contract named JM World as the “Owner” and was signed by Bak in his capacity as director. The Court held that JM World, rather than Bak personally, was the contracting party, rejecting arguments that the Home Building Act required the registered property owner to enter the contract or that the company had not been validly bound under section 127 of the Corporations Act.

The builder later obtained a judgment against JM World for approximately $519,000. After JM World sold its Roseville property, Bak caused approximately $984,000 of the proceeds to be transferred to two South Korean companies associated with him and a Japanese company. A further $50,000 was retained and used to pay a replacement builder working on the Killara home.

JM World was wound up by the Court on 22 June 2021 and Barry Taylor of HLB Mann Judd was appointed liquidator. The liquidator commenced proceedings against Mr Bak and Ms Kim on 21 September 2022. The primary judge found the offshore recipients were not creditors of JM World and declared the transfers to be uncommercial transactions, unreasonable director-related dispositions, creditor-defeating dispositions and voidable transactions.

The Court of Appeal upheld the finding that JM World was insolvent when the transfers were made. After the payments, the company had only about $330 in its bank account, while owing the builder’s judgment debt and approximately $95,000 to the Australian Taxation Office. Justice Black noted that insolvency was not essential to the claim based on unreasonable director-related dispositions, but found the evidence independently established that JM World could not pay its debts.

The most significant issue concerned Kim, who had left control of the company to her husband and had serious psychiatric conditions that impaired her ability to perform her role. The majority held that her continuing inaction enabled Bak to exercise unilateral control and caused the company’s loss. Had she performed her duties, the majority found, she would have asked about the property sale proceeds, raised concerns about unpaid creditors and taken steps to prevent the transfers.

Justice Leeming disagreed, finding that the liquidator had not established that anything Kim could have done would probably have stopped Bak, who controlled the bank accounts and had acted in flagrant disregard of creditors. He stressed that proof of breach does not remove the need to establish factual causation against an inactive director.

The majority also refused to relieve Kim from liability under sections 1317S and 1318 of the Corporations Act. Although she acted honestly and suffered significant mental health issues, the Court held that the primary judge was entitled to weigh those matters against the prejudice to JM World and its creditors, as well as Kim’s personal benefit from improvements to property she substantially owned.

The Court upheld an equitable charge over the Killara property securing the directors’ liability for the building works claim. The majority reasoned that the directors received the benefit of work for which JM World incurred the corresponding liability, making the position sufficiently analogous to cases where company funds are used to improve a director’s property. Compound interest on the payments and retention claims was also upheld.

Read the decision here.

Professionals involved:

• Steven Golledge SC of 3 St James' Hall, John Baird of 8 Windeyer Chambers and Duggan Legal for the liquidator

• Adrian Maroya of 9 Selborne Chambers and Tsavdaridis Lawyers for Eun Hee Kim

• Justin Young of 3 St James' Hall and Kim & Associates for Yeong Jeen Bak